Wednesday, March 10, 2010Managing Wealth with Control and Confidentiality

Sjoerd Koster and Jonathan BaileyChanges in the global economic and financial landscape

Recent months have brought many changes in the global economic climate whereby stock markets around the world have fallen drastically, large financial institutions have collapsed, and governments have had to come up with rescue packages to support their financial systems.

The downfall of the global economy has of course impacted upon the investment portfolios of High Net Worth Individuals (HNWI) and wealthy families. The economic downturn has also highlighted concerns of HNWIs and their advisers over control issues with regards to their investment portfolios, which are traditionally held through fiduciary structures. Every HNWI situation is unique and has different requirements, however in general the structures are in place to limit the risk and exposure from events such as divorce, insolvency or incapacity and the desire to create an effective wealth transfer mechanism for future generations.

In addition to the changes in the financial landscape, wealth planners are also faced with changes in the regulatory environment requiring greater transparency, following various national and international initiatives and driven by international organisations such as the Organisation for Economic Co-operation and Development (OECD) and the Financial Action Task Force (FATF).

Factors for successful wealth management

Is it therefore possible to define the specific factors required for successful wealth structuring?

There is no generic wealth planning structure available for HNWIs and their families. Therefore, new wealth planning solutions will depend on each specific client situation and the ongoing family’s objectives of preserving their wealth. However it is even more apparent than before that in the changing international environment, there is a clear need for collaboration with a team of wealth planning professionals. Solutions have to be carefully structured and properly advised upon, with consideration to the domicile of the client, the location of the assets and other client-specific requirements.

Trusts will typically have an investment manager, who must be given clear parameters to work within. The manager must consider the investment criteria and the risk level as well as capital and income requirements. For added control over the investments, some trusts may have investment committees to help monitor the investment of assets. Whatever structure is decided upon, increasingly HNWIs want to retain an element of control.

HNWI involvement in managing their own wealth

Professional Trustees want to minimise their exposure to risk in respect to the value of investments, while HNWIs often want to increase their control of the investments within the trust without jeopardising the trust structure. The British Virgin Islands (BVI) continues to be pro-active in addressing these needs and has introduced legislation enabling HNWIs to increase their control of investments and management of companies without eroding the integrity of the trust. Two possible solutions available in the BVI are discussed briefly below.

One of the attractive wealth planning solutions available in the BVI, which allows clients direct control over the underlying investments, is VISTA (Virgin Islands Special Trusts Act, 2003). The principal asset of a VISTA Trust is a BVI Company which can hold the investment portfolio(s) of the HNWI as its asset. The legislation provides that, subject to certain events, the Trustee does not have to take any involvement in the running of the company and consequently the investment of the fund. The HNWI can be a director of the company and take responsibility for the running of the investments and the appointment of the appropriate investment advisers. In addition to allowing the HNWI to control the investment, the VISTA Trust also allows the portfolio to remain in trust for future generations. The VISTA Trust can be primarily used as a holding vehicle for trading companies, as well as for holding investment portfolios through a BVI company, plus many other bespoke purposes.

Another wealth planning solution allowing the HNWI to retain some control is the Private Trust Company (PTC). A PTC allows the family to create and own the trust company, which acts as a Trustee for their family trusts and assets, as opposed to having an institutional Trustee that offers its services to the general public. Many HNWIs are concerned about their privacy and the risk of disclosure of confidential information regarding their assets. By making use of a PTC they enjoy a greater degree of control over such information and are also able, as directors, to control the investment of funds. In addition, professional Trustees may be reluctant to take on ownership of assets where a substantial risk may be present, as their preference is normally for a diversified portfolio of low-risk investments. As with VISTA Trusts, PTCs can be used for many purposes other than to allow the HNWI to have an input into control of investments. In a world of increased transparency and with the recent changes in the economic environment, it is essential to have appropriate wealth management structures in place to manage the assets of wealthy families and HNWIs, limiting the risks and achieving the desired investment goals.

There are still many opportunities for international wealth planning. It is however the duty of the professional wealth planners involved to guide and advise the clients, to create sustainable fiduciary structures which will be essential to the future of the international wealth planning industry. The BVI offers ways of doing this by involving the HNWI directly, without jeopardising the legitimacy of the structure, whilst protecting the reputation and limiting the risk of the Trustee.

This article is general in scope and is not intended to be comprehensive. It is not a substitute for legal advice.

Oyster Publications Inc, PO box 3369, Road Town Tortola, British Virgin Islands, VG1110